SPX 1800 / China Liquidity Crisis and QE for EVERYONE

It was a busy night with the Nikkei having a huge run after the failed Abe / Kuroda (QE-Zilla) has failed to turn the economy even a bit (kind of like here in the US) so the assumption is, if a lot doesn't work (and remember, their QE was to double their monetary base in 2 years), then more must be even more useless, or maybe they just need to make it a bit bigger for it to work.

In any case, we have the ECB hinting at QE very openly, Yellen is as dovish as they come and Japan who will not be outdone in the size and scope of Quantitative Easing, looks set to unleash even more.

However there's one country that's not taking part in the liquidity overflow game and that is China, once again as we saw in October and the market didn't care for very their liquidity draining stance much, China has once again refused to inject liquidity in to their system at Thursday's regularly scheduled Open Market Operation, Reverse Repo, NOTHING.

As a result of China draining liquidity on the whole for the week, the overnight repo rate spiked to 5.32%, it's nothing like the 10% June rates last time China REALLY tightened down and drained liquidity, but it is the biggest 2-day jump since then as smaller Chinese banks scramble for liquidity.

It seems to me the last time this happened in Chine Shanghai Real estate had jumped by something like 11% in a week, China had started rocking the boat with Japan at the same time over the Senkaku Islands which is China's go to play every time they have trouble with Japanese hot money flows causing inflation in China, especially in real estate (remember the big clash over the Islands that left every Toyota dealership in China either spray-pained or with rocks through their windows?)

While it seems the S&P Futures are being drug toward 1800 like a tractor beam, China is apparently letting the world know what it will do if the world makes good on all of these QE noises that sends hot money pouring in to China and thus inflation soaring. I'd say China is firing warning shots, but as they do so, the smaller banks are having trouble finding funds on surging overnight repo rates.

The last time this happened in October, the next day there were a string of very strange events and cracks in numerous areas, VIX Futures were bid heavily, protection was being sought and Credit markets haven't recovered since then, it will be interesting to see how far China goes this time (in October they skipped 3 regularly scheduled liquidity injections on a bi-weekly Tuesday/Thursday schedule).

In the US this morning, Industrial Production declined by -0.1% in October from the upwardly revised 0.7% increase in September.

So here we go on a Friday Max Pain Op-Ex operation day, expect volatility around 2 p.m. until then it will be interesting to see if we see any of the same distress signals in areas like VIX futures and a drop in credit as we saw last time China tightened and as we saw yesterday afternoon.